Activist investor Jana Partners’ recommendation that Whole Foods Market Inc. change its entire business has the market wondering what could be ahead for the upscale grocer, with a focus on strategic alternatives such as putting itself up for sale.

The news sent Whole Foods shares up approximately 10 per cent, which isn’t surprising given Jana’s strong track record in the food-at-home industry. That includes its targeting of supermarket chain Safeway and packaged foods giant ConAgra Foods.

While the stock has underperformed of late, and there could be more upside as a result, J.P. Morgan analyst Ken Goldman noted that Whole Foods is already trading at 26x next 12 month P/E and nearly 9x EV to EBITDA.

Goldman noted that following a fair bit of M&A in the grocery space in recent years, Whole Foods’ valuation is well above what others were acquired for.

“We struggle to see anyone buying Whole Foods, which has been comping negatively for a while now, for a significant premium right now over today’s stock price,” the analyst said.

“And in our view, the main problem Whole Foods faces — heightened competition — is difficult to fix,” he added.

Despite having one of the best brands in food retail, until Whole Foods’ prices come down (its earnings will likely follow), Goldman expects further market share losses “no matter what an activist helps improve elsewhere in the business.”

One possibility is that Jana wants to make a shift away from expensive stand-alone stores, and toward potentially cheaper shopping centre locations as an anchor tenant.

The analyst also suggested that while Whole Foods can’t just slash its prices with the hope that related margin losses will be offset by higher volumes, improved analytics could help identify products that drive the greatest elasticity with shoppers.

Given the weak store productivity at Whole Foods, along with factors such as its smaller-than-typical store size for a supermarket, it’s tough to see what a strategic buyer would be interested in.

However, Goldman noted that a large conventional grocer may want to lever the Whole Foods brand within its existing stores, through a ‘Brought to You by Whole Foods’ offering, or something similar.

As for potential financial acquirers, the analyst thinks they would have to be patient, particularly given the pressures caused by technology investments and price cuts.

Goldman noted that it isn’t clear how much excess capital Whole Foods might offer a buyer at first, especially considering that the higher valuation would lead to higher leverage and greater interest payments.

Comments

Postmedia is pleased to bring you a new commenting experience. We are committed to maintaining a lively but civil forum for discussion and encourage all readers to share their views on our articles. We ask you to keep your comments relevant and respectful. Visit our community guidelines for more information.